Earnings Winners And Losers

The market limped into the closing bell on Wednesday after it fended off an early session pullback. There simply weren’t enough buyers to stop the Dow Jones Industrial Average and the S&P 500 from finishing in the red. The NASDAQ held onto a slim gain.

Ironically, the NASDAQ breadth was bearish with more losers than winners, and a lot more down volume than up volume.

The message of the market was right there under the hood: good earnings and guidance were rewarded. Save for L Brands (LB), which rallied at the notion of Leslie Wexler leaving the company, most of the top-ten biggest winners in the S&P were influenced by their earnings or that of a peer company.

The Federal Reserve wrapped up its first Federal Open Market Committee (FOMC) gathering of the year. While I’ve seen wilder gyrations, it was clear investors were anxious about Powell & Co. Wall Street has not only penciled in low rates all year, but many expect at least one more rate cut. 

All the major indices peaked at 2:06:

• S&P 500: 3,293
• Dow Jones Industrial Average: 28,905
• NASDAQ: 9,324

The FOMC 

Savers

Interestingly, the Fed Chairman was blunt about the fact that low rates and other actions were taken by the Fed to help homeowners and stockholders.

Q: Do you have sympathy with savers who have suffered from low-interest rates?

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A: Monetary policy is a “blunt but powerful tool” the Fed uses it to keep inflation low and employment high.  Many, many people benefit from low interest rates -- and you won’t hear many people on low and moderate incomes pleading for higher rates. They want the economy to keep growing.

China

Q: How might the coronavirus outbreak affect China’s ability to deal with its bad debts?

A: China had a significant problem with debts back in 2013 but decided to tackle those high debt levels a few years ago which was one of the causes of the global slowdown.

Powell agrees that the coronavirus will have “some effect on the Chinese economy,” at least in the short-term.

Assets

Q: U.S. stock market levels are very high - are you concerned?

A: We do see asset prices as “somewhat elevated” but not at “extreme levels”.  On the four pillars that assets valuation and stability:

Leverage in Financial System

There are high levels of capital.

Leverage in households

Debt to the Gross Domestic Product (GDP) coming down since the Great Recession: “In a very good place.”

Leverage in Business

It’s an issue Powell has pointed out in the past – I have some concerns.

Asset Valuation

Valuations are somewhat elevated vis-à-vis the price-to-earnings (P/E) ratio. But the stock premium to risk-free debt is not extreme.

Where’s Inflation?

I continue to think everyone is missing what the Fed is most concerned about, and the main reason interest rates remain low and could possibly dip even lower. The persistent lack of inflation continues to confound the Fed. They adjusted their statement, in which Jay Powell clarified during the question-and-answer period was an effort to be clear. It’s not going to be good enough that inflation gets near 2%, but that it smashes through that barrier, hence the symmetrical targeting.

January 29, 2020

The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.

December 11, 2019

The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.

The bottom line is that the Fed is a friend to the stock market, and anyone making moves in the market counter that assessment is asking for too much or making incorrect assumptions.

Earnings

Going out on their shields.After the closing bell, there was a slew of earnings releases with most of them good, but a couple was great, including Tesla (TSLA). Talk about day and night - just think about all the rumors the company wouldn’t get any key funding and that the stock was doomed. There was a chorus of folks saying Elon Musk was a modern-day P.T. Barnum.

The tables have turned. While critics are still talking smack, they are doing it from the poor folks’ line, as most have been smoked, lowering shares shorted to 25 million or 14% of the float. There is an old saying on Wall Street that ‘shorts go out on their shield,’ and that has never been truer than Tesla shorts.

• Tesla (TSLA): +12%
• ServiceNow Inc (NOW): +8.2%
• Qorvo (QRVO): +8.0%
• Cirrus Logic (CRUS): +7.2%
• Lam Research (LRCX): +6.4%
• Meritage Homes (MTH): +6.2%
• Dolby Labs (DLB): +4.6%
• Microsoft (MSFT): +4.3%
• Advanced Micro Devices (ADM): +4.1%

The biggest earnings loser is Facebook (FB), which actually beat the Street on revenue and earnings, as well as key metrics on daily and monthly users.

Today’s Session

Today, the World Health Organization (WHO) is convening an emergency meeting to determine the global risks of the coronavirus. This is happening as more companies pull personnel out of China, and global airlines suspending flights to China. I find the timelines of flight suspensions to be very intriguing, especially American Airlines.

American Airlines is halting flights (Feb. 9 through Mar 27), which means it might take two months for health officials to get the all-clear. It has to be noted that most of the flights have been called off because these planes have been taking off with fewer passengers.

GDP Themes

• Consumers slowed
• Business investment weak (although slightly better than expected)
• IP investing huge
• Housing investment building momentum (down 6 quarters in row and down 8/9 before 3Q 4.6% 4Q 5.8)

We have to drill down, but this report was much better than what many privately thought.

The markets are under pressure this morning.